Ed Peters
May 25, 2022

When the Consumer Price Index (CPI) data was released a couple of weeks ago, there was a sentiment of relief. Headline CPI and Core CPI measures had dropped a bit on year-over-year basis, leading many investors and market pundits to hope that we’re close to “peak inflation.” That is, the highest inflation rate has maxed out, and it will be downhill from here.

Unfortunately, the Fed also uses other measures of inflation shown to better measure the trend in inflation, and these did not agree. Sticky Price CPI, Sticky Price Core CPI, Median CPI and Trimmed Mean CPI are all measures that are thought to better capture the long-term trends in inflation. None of these measures declined in April. They all, in fact, increased at about the same rate they did the months before. The only alternative measure that declined was Flexible Price CPI, which is designed to measure the current economy rather than future trends.

So what are these other measures? The sticky price measures use components of CPI that change infrequently. When they do change, it is likely due to increased underlying costs to the production of those goods and services. Median CPI, as the name suggests, uses the median to exclude those components of CPI which have the largest changes up or down. This is similar to what “core” CPI is supposed to do by excluding food and energy, which are often considered the most volatile CPI components. Likewise, the trimmed mean approach removes 8% of the highest and 8% of lowest changing components when calculating CPI.

All of these alternative methods are attempts to capture the underlying trend in inflation by reducing month-to-month noise. Unfortunately, none of them indicated that we have reached “peak” inflation, which would require several months of declining inflation to confirm a trend, anyway. So it is far too early by any measure to say that inflation is moderating. This would imply that the Fed has a long way to go before its policies will be effective. We can still hope we have hit the peak inflation, but right now it remains a hope.

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